Solving a pricing mystery

Repeatedly in my examination of costing custom cabinetwork, I discover that the price gotten for the work as such shows a very healthy profit, which should be reflected at the end of the year in the company’s financial totals. But often this is not the case, and even if there is a profit, it is small in comparison to what the pricing indicates.

Examining the evidence 

Just early this month I had another occasion to verify that my observation is correct once again. Both my client and I wanted fully to understand what was going on. We took a sample job, which he had quoted some month ago, and looked at the costs and the price obtained.

Material costs were spot on, no problem there. In this case, the shop owner, from years of experience and using a reasonable method, determined the labor costs. (Of course, using past data to determine labor costs does not allow for continuous improvement, but that is something for another discussion.)

To verify the costs and pricing I entered the data for the job into my Excel pricing file. This database has been fine-tuned over years of exposure to all kinds of costing examples around the United States.
After making the necessary adjustments for the client’s mode of operation regarding processes, hourly labor costs, and price quoted, once again both the client and I were at loss as to why the profit shown did not manifest itself in the final financial statement.

A suspect is found 

Therefore, we looked at other jobs done over the last several months with the eye to see if things were very different from the job we had just evaluated. What we found was a job requiring special detailed features totally out of touch with the other cabinets being built. When we looked at the details, we discovered that this job took much more time than normal. This job took processes, which did not fit the flow in the shop and to some extent the skill set.

The consensus was that very little money was made in this case. The lesson is that we cannot be everything to everybody and expect consistent results.

Further investigation 

Therefore, we found one culprit as to why our numbers do not add up. From experience I knew there had to be others. Next we looked at the number of jobs in process, their total value versus the annual output. What we found was far too much work in process. The result is clutter, waste of space, confusion, potential damage, and extra costs. The old adage “the longer it stays in the shop the more it costs” cannot be denied either.

This brings us to the second culprit as to why the numbers do not add up.

Besides the above, what is more pervasive and hard to define, is the hidden cost in the obvious stop-this-and-start-that required to satisfy a given situation incorrectly planned. Harmonizing production planning with customer’s requirements is one of the most vital tasks if profit margins are to be in accordance with expectations.

A further consequence of incorrect planning is a possible misuse of labor recourses on given days when the capacity is wasted. Such waste of capacity is often not fully understood as to its total cost.

Remember the opportunity cost per man-hour your business must generate.


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About the author
Gero Sassenberg

Gero Sassenberg has decades of experience in the woodworking industry on three continents, specialized in management and engineering consulting to cabinet and furniture manufacturers. He focuses on continuous improvement resulting in greater growth and profitability. He was a regular contributor to CabinetMaker and CabinetMakerFDM for many years.